11/01 Extra dimension

Mr Deepak Mishra, Lead Economist at the World Bank’s Vietnam’s office.

▪  CAM LE
16:18 (GMT+7) - Tuesday, January 11, 2011

Mr Deepak Mishra, Lead Economist at the World Bank’s Vietnam’s office, shares his thoughts on Vietnam’s economy.

Have your original impressions on Vietnam been validated? Any surprises?

I took on this job with very high expectations. So far I have not been disappointed. If anything, there have been many pleasant surprises. First, I have been surprised at the level of candour and the space for dialogue among government officials on economic matters. In this regard, hearing the discussion in the current National Assembly is like inhaling a breath of fresh air. Second, my biggest surprise has come from better understanding the Vietnamese people and their culture. 

When a country grows rapidly, economists tend to credit it to either good policies or good institutions or good luck. But I would like to add a fourth explanation: its people. I think Vietnam’s development success owes much to the Vietnamese people - pragmatic, resilient, industrious, mobile and entrepreneurial (I call it the PRIME effect) - and this dimension has perhaps been under-emphasised in the growth literature.

What economic problems have surprised you?

 

When a country grows so rapidly from such a low base like Vietnam has, there are bound to be some problems. So yes, there are areas where Vietnam could do better. A stable macro-economic environment is a necessary condition for robust investment and rapid growth and so the recent instability - manifested in the form of rising prices and volatility in the foreign exchange market - is a matter of concern.  

The discovery of some of the problems at Vinashin and what it implies for the financial health and governance of the broader state owned enterprise sector is another area for improvement. And then there are many medium-term economic challenges that should be redressed.

 

Vietnam’s past growth has relied excessively on factor accumulation (capital, labour, land and natural resources) and less on productivity, technology and knowledge, and this need to be gradually altered.

Similarly, there is a growing perception that income inequality is rising in Vietnam and some of the ethnic minorities are unable to participate fully in the growth process.  

 Research at the World Bank shows that Vietnam will be one of the most adversely affected countries from climate change and therefore would need to put in place a mechanism to mitigate and adapt to these changes. Finally, Vietnam has become a middle income country and would have to increase the speed of reforms towards a market economy in order to avoid the middle income country trap.

What do you advise authorities in their policy-making for macro-economic stability?

 

Vietnam’s current macroeconomic problems should be viewed from a global perspective. With greater integration to the global economy, Vietnam has benefited from higher foreign investment, exports and economic growth, but at the same time has become more exposed to external shocks. While some of these shocks required the government to pursue tight policies, others forced it to adopt more accommodative policies. And synchronising the direction of policy change to the global shocks requires extreme levels of finesse and dexterity, which even policymakers in developed countries often fail to have. 

You mentioned low productivity of capital and the limits of a growth model that depends on factor accumulation. Vietnam has one of the highest investment rates in the world, and FDI and the domestic private sector account for a large share of it. Does this mean that the private sector is overestimating returns on capital?

 

The increased FDI and private sector investment in recent years is based on future growth and profitability and not based solely on current return to capital. Moreover, some of the initial investments are likely to have gone to build fixed capital for the company - land, factory, machinery, equipment etc. - which may explain the lower productivity of current capital.

Second, public investment in Vietnam is still considerably high. In 2009, government investment was 14 per cent of GDP, which is nearly 36 per cent of total investment in the country. Some of the investment by SOEs, especially those that are equitised, is recorded as private investment. So the level of total public sector investment is considerably higher in Vietnam than in most developing countries.

It is perceived that the unit cost of building infrastructure in Vietnam is considerably high and increasing. We are therefore working on a project with the government - Public Investment Reform - which aims to raise the productivity of public sector capital through improved project selection, better execution and stronger monitoring systems. There is also considerable scope to improve the overall investment climate that could enhance productivity of private capital as well.

What is your long-term prognosis on Vietnam’s future?

 

Behind every problem lies an opportunity. I therefore remain optimistic about Vietnam’s long-term future. There are many factors underlying this optimism, but let me express one of them here. In my limited interactions with government officials, local academics and researchers I have noticed they tend to be less optimistic about their country’s future than their foreign counterparts. And to me this is a positive sign.  

I have worked in countries in Africa and South Asia where insiders (citizens) were very content with their country’s performance while outsiders (foreigners) were critical, and economic performance in many of these countries began to stagnate over time. Fortunately, I do not see something like that happening in Vietnam anytime soon
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